Why Do Managers Explain Their Earnings Forecasts?

Why Do Managers Explain Their Earnings Forecasts? ABSTRACT Managers often explain their earnings forecasts by linking forecasted performance to their internal actions and the actions of parties external to the firm. These attributions potentially aid investors in the interpretation of management forecasts by confirming known relationships between attributions and profitability or by identifying additional causes that investors should consider when forecasting earnings. We investigate why managers choose to provide attributions with their forecasts and whether the attributions are related to security price reactions to management earnings forecasts. Using a sample of 951 management earnings forecasts issued from 1993 to 1996, we find that attributions are more likely for larger firms, less likely for firms in regulated industries, less likely for forecasts issued over longer horizons, more likely for bad news forecasts, and more likely for forecasts that are maximum type. Furthermore, attributions are associated with greater absolute price reactions to management forecasts, more negative price reactions to management forecasts (forecast news held constant), and a greater price reaction per dollar of unexpected earnings. Our findings hold after control for the aforementioned determinants of attributions and after control for other firm‐ and forecast‐specific variables that are often associated with security prices. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting Research Wiley

Why Do Managers Explain Their Earnings Forecasts?

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Publisher
Wiley Subscription Services, Inc., A Wiley Company
Copyright
Copyright © 2004 Wiley Subscription Services, Inc., A Wiley Company
ISSN
0021-8456
eISSN
1475-679X
D.O.I.
10.1111/j.1475-679X.2004.00127.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT Managers often explain their earnings forecasts by linking forecasted performance to their internal actions and the actions of parties external to the firm. These attributions potentially aid investors in the interpretation of management forecasts by confirming known relationships between attributions and profitability or by identifying additional causes that investors should consider when forecasting earnings. We investigate why managers choose to provide attributions with their forecasts and whether the attributions are related to security price reactions to management earnings forecasts. Using a sample of 951 management earnings forecasts issued from 1993 to 1996, we find that attributions are more likely for larger firms, less likely for firms in regulated industries, less likely for forecasts issued over longer horizons, more likely for bad news forecasts, and more likely for forecasts that are maximum type. Furthermore, attributions are associated with greater absolute price reactions to management forecasts, more negative price reactions to management forecasts (forecast news held constant), and a greater price reaction per dollar of unexpected earnings. Our findings hold after control for the aforementioned determinants of attributions and after control for other firm‐ and forecast‐specific variables that are often associated with security prices.

Journal

Journal of Accounting ResearchWiley

Published: Mar 1, 2004

References

  • Voluntary Causal Disclosures: Tendencies and Capital Market Reaction
    Baginski, Baginski; Hassell, Hassell; Hillison, Hillison
  • Disclosure Level and the Cost of Equity Capital
    Botosan, Botosan
  • Evidence that Management Discussion and Analysis (MD&A) Is Part of a Firm's Overall Disclosure Package
    Clarkson, Clarkson; Kao, Kao; Richardson, Richardson
  • Disclosure, Liquidity and Cost of Capital
    Diamond, Diamond; Verrecchia, Verrecchia
  • Stock Performance and Intermediation Changes Surrounding Sustained Increases in Disclosure
    Healy, Healy; Hutton, Hutton; Palepu, Palepu
  • The Role of Supplementary Statements with Management Earnings Forecasts
    Hutton, Hutton; Miller, Miller; Skinner, Skinner
  • A Simple Model of Capital Market Equilibrium with Incomplete Information
    Merton, Merton
  • Earnings Disclosure and Stockholder Lawsuits
    Skinner, Skinner

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